How do I know my insurance company can pay my claim?

Understanding insurance carrier financial stability

Purchasing homeowners insurance is like buying a promise — the promise that if one of life’s worst moments occurs, you could rebuild your home. When you select a home insurer, you do so hoping you never need it. You pay your premium, but how do you know your insurance company will be there when it matters most?

Working with a trusted insurance agent to select the best coverages to fit your home and lifestyle can help ensure you have the protection you need, especially in coastal areas. In addition to understanding your coverages, knowing you’re working with a financially stable insurance carrier will provide the additional assurance you need. But how do you determine an insurance company’s financial stability?

Several factors help paint the picture of stability for insurance carriers: the company’s third-party financial ratings, capital and the reinsurance purchased by the insurance carrier. Let’s look at each of these, what they mean and how they work together.

How is an insurance company’s financial rating determined?

AM Best and Demotech are two different financial rating companies. Each uses its own method for determining financial stability.

AM Best issues Financial Strength Ratings. As the oldest rating agency, it provides a rating based on a qualitative and quantitative analysis of a company’s balance sheet, operating performance and business profile.

Demotech issues Financial Stability Ratings (FSR), with a focus on smaller regional carriers. The FSR summarizes their opinion of the financial stability of an insurance company. Their philosophy is that even small insurers can be as financially stable as the largest insurance companies, and they use factors other than size and financials to determine stability.

With a different approach to rating, the two cannot be compared. Both provide an independent, reputable assessment of an insurance company’s ability to pay claims.

Why does an insurance company’s capital matter?

Financially strong insurance companies have enough capital to absorb losses. A company’s capital, referred to as policyholder surplus, is the money left over after an insurer pays its liabilities, including expected claims. This represents the cushion that protects policyholders in the event of unexpected or catastrophic losses. If an insurer’s policyholder surplus is negative, then the company is insolvent, meaning it is unable to pay its current liabilities, let alone have a cushion for unexpected losses.

Insurance companies are regulated by individual state governments and have minimum capital requirements. In many cases, these requirements apply to a broad cross-section of insurers and are very modest. Risk-Based Capital (RBC) is a more sophisticated model for determining minimum capital requirements that was developed by the National Association of Insurance Commissioners. It accounts for the various risks that an insurer is exposed to, including underwriting, catastrophe and operational risk. If a company’s RBC ratio drops below a certain level, regulatory action can be taken.

What is reinsurance?

Reinsurance, or insurance for insurance companies, is one way for insurance companies to manage risk and ensure they can pay claims, especially claims caused by hurricanes and other catastrophes. The amount, quality and type of reinsurance a company purchases are indicators of its ability to pay future claims and weather disasters.

The best picture of an insurance company’s financial stability is to confirm strength in each of these areas: capital, financial rating and reinsurance. Not one alone will provide a clear picture of financial solvency. Together, they can deliver a comprehensive look at an insurance company’s ability to fulfill its financial obligations to its policyholders.

Talk with your insurance professional about these financial stability factors and whether the insurance carrier you’ve selected has the appropriate capital, financial ratings and reinsurance to withstand market conditions and be there when you need them most. If you want more information about the financial stability of SURE, an insurance carrier for SageSure products, click here.